TK 25 
• S2 A3 

1910a 
Copy 2 



Rate Calculations 



FOR 



Electric Light and Power 



REPORT TO 



ST. LOUIS PUBLIC SERVICE 
COMMISSION 



BY 

James E. Allison, 

Commissioner and Chief Engineer 



Rate Calculations 



for 



Electric Light and Power 



REPORT TO 

ST. LOUIS PUBLIC SERVICE 
COMMISSION 



BY 



James E. Allison, 

Commissioner and Chief Engineer 



W^7 



TKas 



DEFINITION OF TERMS. 



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"Cause Theory." The calculation of a rate by 
distributing the Investment Charge in proportion 
to the Consumers' Peak Responsibility, or cause 
of investment. (See page 3 this report, or Part 
VI, first report.) 

"Use Theory." The calculation of a rate by 
distributing the Investment Charge in proportion 
to the Consumers' use of the investment or K. W. 
H. Consumption. (See page 6 of this report, or 
Part VI, first report.) 

"Expediency." The departure from "cost to 
serve" rates necessary to maintain the output at 
the point where the lowest cost can be obtained for 
the consumers as a whole. (See also Part VIII, 
first report.) 

"Investment Peak." The highest point in the 
yearly load curve. (See pages 3 and 4, first report.) 

' l Peak Responsibility. ' ' The Consumers ' share 
in the K. W. demand on the Investment Peak. 

"Customers' Charge." (See page 4, this re- 
port, or page 3, first report.) 

"Manufacturing Charge." (See page 5, this 
report, or page 3, first report.) 

"Investment Charge. ' ' (See page 5, this report, 
or page 3, first report.) 

"Distance Factor." Factor needed to correct 
differences in investment in distribution equip- 
ment to serve different consumers. (Generally not 
determinable.) 



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Messrs. Joseph L. Hornsby, Chairman; 
James A. Waterworth, 
James E. Allison, 

Saint Louis Public Service Commission. 
Gentlemen: 

In submitting to you a report on Analysis of 
Rate Calculations for electric light and power, 
dated August 25th, 1910, the writer attempted to 
show the fallacy of some of the methods of calcula- 
tion in use for arriving at a measure of "cost to 
serve" in electric rates. 

The principal object of the report was to lay be- 
fore the Commission the fact that calculations 
based upon the connected load or maximum de- 
mand of the consumer as used, could not be success- 
fully set up as a true measure of the cost to serve 
the consumer, especially the residence consumer. 

The analysis was also intended to show that two 
methods of distributing the investment charge 
might be set up, one based upon the investment 
which the consumer may cause, and another based 
upon his use of the investment. 

The writer has been misunderstood in some quar- 
ters as advocating the Use method alone, or even 
so far misunderstood as to be advocating a level 
rate. No one with even a superficial knowledge 
of the principles and conditions of rate making 
can think for an instant that a level rate is either 
practicable or just. 

While the Cause Theory and Use Theory are 
both, to a certain extent, logical, yet calculations 
based upon them fail of scientific correctness. 

First: In that while both the cause and the use 
of the investment should be considered in a cost to 
serve rate, unfortunately there is no logical means 
by which the relative importance of the two theo- 
ries can be determined or combined into one cal- 
culation. 



Second: In that in calculating rates, according 
both to the Cause Theory and the Use Theory, the 
differentiation of the rates is necessarily based 
upon data derived almost entirely from the gen- 
erating end of the business, and no account is 
taken of the difference in distribution equipment 
required by different consumers. 

Third: In that the Expediency principle, which 
is of very great importance, both to the company 
and to the consumer, cannot be mathematically 
taken into the calculations. 

There is a possible third theory or rather method 
of calculating rates which in its effect may be said 
to be a compromise between the Cause Theory and 
the Use Theory. This method is based upon the 
theoretical assumption that the operation of the 
plant and the investment in the plant are entirely 
separated, just as if the operating department rent- 
ed the plant from the owners. There is, then, a 
fixed rent or return assumed upon the investment, 
and an entirely separate profit or return fixed upon 
the operation or volume of business. This profit 
would be charged up to the manufacturing cost in 
the current, and, being added to each K. W. H. as 
manufacturing profit, would be distributed among 
the consumers in accordance with the use or K. W. 
H. Consumption, thereby in a measure making con- 
cession to the Use Theory, the distribution of the 
investment charge being made by the Cause 
Theory. 

The trouble with this method is, that if in divid- 
ing the profit or return between investment and 
operation we consider the usual percent of return 
on volume of sales in any staple business, we find 
that the calculation brings very little difference in 
results from calculations based purely upon the 
Cause Theory. 

Admitting that there is no absolutely scientific 
and accurate method of calculating cost to serve 



rates, what method is it advisable to adopt to arrive 
at what may be as nearly as possible just and prac- 
ticable results ? 

About the only course left open is to have calcu- 
lations made by formulae, derived both from the 
Cause Theory and the Use Theory, and then to 
take as approximate standards such compromises 
between these two rates as may be arrived at by 
judgment alone. 

Having these standards, the Commission must 
again rely to a large extent upon its judgment in 
allowing concessions to the Expediency principle, 
and to the distance or distribution investment fac- 
tor. This last factor being sometimes used as an 
argument to justify wholesale discounts. 

The conclusion that scientifically correct rates 
for electricity cannot be mathematically calculated 
is not a welcome one, but it is the truth, and it is 
much better to know and acknowledge the truth 
than to follow blindly a false or only partially true 
formula. Especially is this true in the case of a 
Public Service Commission charged with the duty 
of fairness both to the consumer and the company. 

While we cannot say that a rate is absolutely 
correct scientifically, yet with the data available it 
is quite possible to arrive at rates which will not 
only be substantially just and perfectly practical, 
but which can also, in a measure, be defended sci- 
entifically. 

CAUSE THEORY RATES. 

The Cause Theory is based upon the assumption 
that the investment in plant is made to meet the 
demand of the highest peak, and that therefore 
each individual's share in paying the yearly invest- 
ment charge should be in direct proportion to his 
peak responsibility, i. e., to his share in this highest 
or investment peak. 

The theory has two decidedly weak points. 



First, it assigns all of the investment charge to the 
consumer or the current which comes on the invest- 
ment peak, and absolutely none of the investment 
charge to those consumers or that portion of the 
current which does not come on the peak. 

Second, there is no practical way of determining 
the Peak Responsibility of the individual con- 
sumer, and we are driven in making calculations 
to use the Peak Responsibility of classes of con- 
sumers. 

These class Peak Responsibilities may be ob- 
tained as described in relation to residence load 
on page 29 of my former report. It is evident, 
however, that the segregation of classes of busi- 
ness upon separate feeders, in order to obtain 
data, may not always be an easy or simple matter. 

As pointed out in my former report, the justice 
of applying class data to the individual is measured 
by the similarity in shape of his load curve to the 
load curve of his class. 

Fortunately, in two important classes of con- 
sumers, residence and power, we may assume that 
the class load curves and the individual load cum es 
are approximately parallel, at least enough so to 
assume that there will be no great injustice in as- 
signing to the individual the same K. W. of Peak 
Responsibility per K. W. H. of consumption as is 
shown to be right for his class. 

Being assured, then, that our data will enable 
us to get approximately correct results to the indi- 
vidual, according to the Cause Theory, in at least 
the residence and power classes, we may proc ;ed 
to develop our formula for the calculation. 

First, we take the gross income required to be 
obtained from the sale of current, which should 
equal the operating expenses, plus the taxes and 
insurance, plus the proper depreciation and amor- 
tization charges, plus the proper return on the in- 
vestment. This we call the Total Cost. 



This Total Cost we then divide into three parts. 

First: The Customer's Charge, which is that 
portion of the cost caused by the mere connection 
of the customer, irrespective of his use of current. 
Costs assignable to this charge being such as the 
cost of reading the meter, making the bills, keeping 
the accounts, etc., etc. The charge being the same 
for each individual consumer. 

Second: The Manufacturing Charge, or cost of 
manufacturing and delivering the current, irre- 
spective of the investment. 

Third: The Investment or Demand Charge, con- 
sisting of return on investment, taxes and insur- 
ance, depreciation and perhaps some of the oper- 
ating charges traceable to demand. 

The selection of the items of expense which 
should properly be included in the Customers' 
Charge is a matter of much debate, and according 
to the mind of the ratemaker, the Customers' 
Charge may be made to vary greatly. 

To obtain the rate for a class (or an individual, 
if we could get the data) we have the Peak Respon- 
sibility of the class obtained as shown in part VII. 
of my former report, and as the theory assumes 
that Peak Responsibility is the measure of invest- 
ment responsibility, the investment charge for the 
class would be the same decimal of the total invest- 
ment charge as the class peak responsibility is of 
the investment peak. 

It is also evident that the class charge for manu- 
facturing cost would be the same decimal of the 
total manufacturing cost as the class consumption 
of K. W. H. is of the total consumption of K. W. H. 

The individual Customer's Charge would be the 
total Customers ' Charge divided by the total num- 
ber of customers, and the amount of Customers' 
Charge assignable to a class would be the Individ- 



8 

ual Customer's Charge multiplied by the number 
of customers in the class. 

Having, then, the investment cost for the class, 
the manufacturing cost for the class and the total 
Customers' Charge for the class, we have but to 
divide the sum of them by the estimated or ascer- 
tained K. W. H. Consumption of the class to ar- 
rive at the average rate of the class. 

However, as the Customers' Charge should prop- 
erly be assigned flat to each customer, it is better 
to so divide the calculation as to give the rate ex- 
clusive of the Customers ' Charge, and also with the 
Customers ' Charge absorbed. 

Reducing to formulae, let 

R = Total Cost. 

A = Total Investment Charge. 

B = Total Manufacturing Charge. 

C = Total Customers' Charge. 

D = Total Consumption K. W. H. 

E = Total Number of Consumers. 

P = Investment Peak (K. W.). 

A + B+ C = R. 

r = Class Peak Responsibility (K. W.). 

s = Class Consumption (K. W. H.). 

t = Number of Consumers in class. 

X = Class Rate exclusive of Customers' Charge. 

Y = Class Rate with Customers' Charge absorbed 

r 
-p=Decimal of Class Peak Responsibility. 

c 

j^= Decimal of Class Manufacturing Cost Re- 
sponsibility. 



Q 

p-= Individual Customer's Charge. 
Then: 

r A , s Vl 



f A + ir B + h 



= Y 



C 

When X is used as rate, — would be charged 

flat to each customer. 

USE THEORY RATES. 

In the Use Theory, we start with the assumption 
that each consumer should pay investment charges 
according to the portion of the plant he uses, re- 
gardless of whether it is on or off the peak, and 
also in proportion to the duration of the time he 
uses it. In other words, for each kilowatt hour of 
service he pays his prorate of the investment 
charge as divided among all the kilowatt hours pro- 
duced during the year. 

The weak point in this theory is that it makes 
no provision for a just charge to the consumer who 
causes a large investment and contributes a small 
return toward the general fund for paying the in- 
vestment charges. 

Nevertheless, it does provide investment charges 
for the off-peak load, which gets the benefit of the 
investment as well as the peak load. 

The formula for calculating rates by the Use 
Theory is developed by simply taking the total 
Investment Charge plus the Total Manufacturing 
Charge and distributing it equally over the total 
estimated K. W. H. consumption. To this there is 



10 

to be added the Customers' Charge, either flat to 
each customer, or if it is to be absorbed into the 
rate by classes, the Individual Customer's Charge 
is multiplied by the number of customers in the 
class and divided by the K. W. H. Consumption of 
the class. The result is, the extra charge to be 
added in absorbing the Customer's Charge into 
the class rate. 

Reducing to formula and using the same letters 
as in the Cause Theory, we have 

A + B 
D ~ X 

A+ B ^_ E^ v 

D ~" "T 

r 

When X is used as rate — would be charged 

flat to each customer. 

Having developed our formula for calculating 
rates according to the two theories, Cause and Use 
of the Investment, let us briefly review the points 
in which they supplement each other. 

The Cause or Peak Responsibility Theory, as 
we see, does not provide that the off-peak load shall 
pay any of the investment charges. Now, as a 
matter of fact, the benefit derived by the consumer 
from the Company's investment or his use of that 
investment may not be at all in proportion to his 
peak responsibility. Yet, by the Cause Theory he 
pays investment charges directly in proportion 
to it. 

For illustration, let us suppose the extreme case 
of a theater which does not give matinees. Here 
we would have a large load, no part of which would 
be likely to come on the peak. It would, therefore, 
by the strict application of the Cause Theory, es- 



11 

cape all investment charges, and if all returns and 
profits were figured as part of the investment 
charges, the current would even be sold at exact 
cost to the Company. The result, we see, is an 
absurdity, in that this consumer has the use and 
benefit of large investment which is paid for by 
some one else. The same reasoning will apply in 
a measure to all loads having small peak responsi- 
bility in proportion to their use of the plant (or K. 
W. H. consumed), and it will apply inversely to 
loads having large peak responsibility in propor- 
tion to their use of the plant (or K. W. H.). 

The Use Theory is the exact opposite of the 
Cause Theory, in that it considers exclusively the 
use of the plant made by the consumer, to the en- 
tire neglect of his peak responsibility. The one, 
in a way, supplements the other, and (leaving out 
of account the Expediency principle and the dis- 
tance factor) we may assume with as much confi- 
dence as is possible in dealing with the kaleido- 
scopic question of rates that approximate truth is 
somewhere between the results of the two calcu- 
lations. 

At what point between these two results the 
approximate truth may lie, must, as stated before, 
be determined by judgment alone. In such a case 
there is, unfortunately, very little to base judg- 
ment upon. Very fortunately, however, the re- 
sults of the two calculations when applied to ac- 
tual facts do not show a wide variation, as is seen 
by reference to Table I. 

In this Table the actual operations of the Union 
Electric Light and Power Company for the year 
1909 have been taken as a basis for the calculation 
(the street railway business being omitted). 

The figures are, of course, only used for illustra- 
tion, and it is not intended to imply that the rates 
evolved are either correct or incorrect for produc- 
ing a proper return. 



12 

RESIDENCE RATES. 

In Table I. the writer has assumed five different 
amounts as individual Customer's Charge per year, 
namely: $6.00, $9.00, $12.00, $15.00 and $18.00 per 
year per customer; and the Table shows rates cal- 
culated under each of these assumptions. It is 
seen by comparing the results that in residence 
rates, especially, the Customers' Charge is really 
the controlling factor in the differentiation of the 
rate. This fact is shown by comparing the figures 
opposite " residence" in columns 3 and 8 of the 
Table, as they appear in the $6.00, $9.00, $12.00, 
$15.00 or $18.00 Customers' Charge group. 

It is seen that a difference of about 4 cents per 
K. W. H. is made in the average residence rate by 
assigning $18.00 per year, or $6.00 per year per cus- 
tomer, to this charge. It is evident, therefore, that 
to obtain an approximately just rate great care 
must be exercised in selecting those items which 
can properly be taken into account in making up 
the Customers' Charge. By loose reasoning on 
this point it is possible to place a very unjust bur- 
den upon the small consumer and upon the resi- 
dence consumers as a whole. 

No item should be accepted unless it is shown to 
be such as is caused directly by the consumer irre- 
spective of his use of current, and that each con- 
sumer is responsible for approximately an equal 
amount of the item. If this cannot be demon- 
strated it must be assumed either that the item is 
one caused in proportion to the use or K. W. H. 
Consumption, or that it is of such a general nature 
that it should be assigned in proportion to the bene- 
fit in service received by the consumer. In either 
case the item would properly be a K. W. H. charge. 

It has been argued that all the items of general 
expense such as executive salaries, etc., etc., should 
be included in Customers' Charge. The basis of 



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14 

this argument is that general expenses increase or 
decrease directly as the number of customers in- 
crease or decrease, and therefore the customers 
should bear an equal individual responsibility for 
such charges. 

In the first place, the assumption is erroneous. 
As shown by Table II. (made from the Union Elec- 
tric Light and Power Company's books), the gen- 
eral expense does not increase or decrease in direct 
proportion to the number of customers. In the 
second place, even if it did, that is no demonstra- 
tion that each customer, regardless of his consump- 
tion, is equally responsible for the charge, and the 
possible injustice of loading up the small consumer 
with charges for which he may not be responsible 
is quite apparent. 

Table III. shows the variation of general ex- 
pense as applied to each K. W. II. of output, and it 
is seen that an argument that general expense in- 
creases or decreases with output is quite as tenable 
as the argument that it varies with the number of 
customers. 

In Table II. the highest point of the charge per 
customer is 132 per cent of the lowest point, while 
in Table III. the highest point of the charge per 
K. W. H. is only 119 per cent of the lowest point, 
showing that the general expense follows more 
closely to the variation of the output than it does 
to variation of the number of customers. 

The argument is not conclusive either way, as 
assignment of items to general expense may be 
varied with accounting methods. 

It is true that certain items and portions of items 
of general expense may be justly assigned to Cus- 
tomers ' Charge, but such items must be carefully 
sought out and their relation to the customer defi- 
nitely established. 

In cases of doubt, the benefit must be given to 
the small man, and no " glittering generali ties" can 



15 

be accepted as ground for swelling the Customers' 
Charge. 

It has been advanced as an argument for high 
residence rates that the efficiency of distribution 
for residence load is very low on account of the con- 
stant 24-hour iron loss in the transformers, but 
actual measurements of the all-day efficiency do 
not show that the efficiency of distribution in resi- 
dences is less than the average efficiency of dis- 
tribution for the whole plant. 

In other words, actual measurements in the case 
under consideration do not show that there is 
greater loss in distributing to residences than to 
the average business. 

Table I. also shows the rates worked out on the 
basis of distributing the Investment Charge in 
proportion to the Connected Load by each class, 
and the results as shown in column 12 tend to prove 
the writer's contention in his former report that 
Connected Load is not a proper factor in rate 
making. 

The only reason which can be advanced for u^ing 
Connected Load as a factor is that it is an attempt 
to measure the consumer's peak responsibility. 
Under the Cause Theory in the Table, we show, 
by another method, rates in which the peak respon- 
sibility is obtained, as closely as is possible with 
existing data. A comparison of the figures in col- 
umn 3, column 8 and column 12 will show the in- 
justice which might be done, especially to the 
residence class, by allowing the connected load 
method of calculation to stand as correct. 

No company of any size can, of course, put into 
effect residence rates based upon a distribution of 
investment charges in proportion to Connected 
load, but the calculation has been used, and will 
probably continue to be used, until thoroughly dis- 
credited, as an argument to justify high residence 
rates. 



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17 

Table I. shows, in columns 7, 11 and 15, the 
portions of the revenue to be produced from each 
class under the different theories and by the differ- 
ent assumptions of Customers' Charge. The total 
revenue in each case should be the same, but the 
figures in the Table vary slightly, owing to the 
calculations not being carried out beyond three, 
four or five decimal points in some of the factors. 

Column 5 in Table I. shows the average class rate 
under the Cause Theory which would be paid per 
K. W. H. provided the Customers' Charges were 
assessed flat to each customer, and column 10 shows 
the same charge under the Use Theory. 

The assessment of the Customers' Charge flat to 
each customer is the theoretically correct and just 
plan for distributing that part of "cost to serve" 
among the customers, but on account of the ex- 
treme unpopularity of any flat charge there are 
very serious questions of policy involved in decid- 
ing whether to assign the Customers' Charge flat to 
each consumer or to absorb it in an average class 
rate. 

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dence load curves are approximately parallel to the 
class curves, then the rate under either the Cause 
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entiation caused by the customer charge) should be 
the same for all consumers in that class, unless the 
application of the Expediency principle is shown 
to be necessary. A study of the classification of 
customers, according to consumption, as compiled 
for the Commission, shows us that in the residence 
class there are practically no really large consum- 
ers, and the number who are enjoying appreciable 
discounts for quantity would not materially affect 
the business, even if they betook themselves to 
other sources of light. As a matter of fact, the 
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19 

likely person to discontinue service on account of 
price. 

It can therefore be concluded that the Expedi- 
ency principle is not applicable to the residence 
class unless it can be shown to be both just and 
necessary that this class should be burdened with 
some of the costs of other classes of consumers. 

If the last condition is not admitted we can 
conclude that the results arrived at from the use 
of the formulae will give very closely the correct 
rates for residence light. 

POWER RATES. 

In considering the rates for power we can as- 
sume that, generally speaking, there is a similarity 
between the individual customer's load curve and 
the load curve for the class, and that therefore a 
similar K. W. H. rate applied throughout the class 
.would be approximately just, but in this class the 
Expediency principle becomes a powerful factor 
in deciding the proper rate, as there are many 
large users who would be driven to other sources 
of power if charged the average rate for the class. 
The enforcement of such a rate might, and proba- 
bly would, cause a very appreciable loss in volume 
of business, with the result that the remaining con- 
sumers would be compelled to pay more than would 
be the case if the rates were adjusted to meet the 
conditions. 

It will, therefore, probably be found, for the 
benefit of all, that the Company be allowed to 
charge a rate in some cases higher and in some 
cases lower than the average class rate. 

MUNICIPAL LIGHT. 

In considering the rate for Municipal lighting, 
the Commission is confronted with the existence 
of a long-time contract which cannot be changed. 
The only course, then, is, if the charge is found too 
high, to shift the surplus return to the benefit of the 



20 

other consumers. If the rate is found to be too low, 
the deficit must be shouldered by the other con- 
sumers. 

It is seen here that under strict regulation it is 
to the disadvantage of the general consumer for 
the City to pay too low a rate for Municipal light. 
It is, however, to the advantage of the taxpayer 
that the City obtain as low a rate as possible. 

BUSINESS LIGHT. 

In the foregoing classification of consumers into 
Residence, Power and Municipal, it has been as- 
sumed with what seems probable correctness that 
the load curves of the individual consumer are in 
most cases approximately parallel to the class load 
curve and that therefore the application of the 
class rate to the individuals (taking Expediency 
into account in Power rates) will bring about rates 
as nearly correct as can be expected in dealing with 
a subject having so many necessarily neglected fac- 
tors. But in making the classification which we 
call Business Light we have included therein all 
consumers other than Residence, Power or Munici- 
pal. This is really no classification at all, and the 
average rate evolved for this Business Light class 
is merely the average rate for the balance of the 
business after deducting that of the first three 
classes from the whole. 

The multiplicity of uses, demands and conditions 
included in the class, and the very meager data at 
present available for determining the actual peak 
responsibility of the different kinds of consumers, 
prevents the application to the individual of the 
average class rate calculated by the Cause Theory 
or peak responsibility. This same meagerness of 
data renders the division of the Business Light 
consumers into accurate classification as to peak 
responsibility, a practical impossibility beyond a 
few rough subdivisions. 



21 

It will probably be possible eventually to so di- 
vide Business Light into sub-classes in accordance 
with parallel load curves as to obtain satisfactory 
rate calculations under Cause Theory for a great 
number of consumers, but to carry out the experi- 
ments necessary for obtaining the requisite data 
will probably require several years' time. 

In applying the Use Theory, however, we have 
all the necessary data, for in this calculation the 
individual consumer pays investment charges in 
accordance with the service rendered him, or by his 
K. W. H. consumption as shown by his meter read- 
ings. But while this calculation may be correct for 
the individual so far as it goes, we have no means 
of determining how far the result should be modi- 
fied by his peak responsibility, i. e., by the Cause 
Theory. 

In this class also it will be found that the Expe- 
diency principle is a very powerful factor, and that 
undoubtedly if a strictly average cost to serve rate 
were adhered to, large portions of the business 
would be lost, causing in the end an increase in 
rate to those consumers who would remain. 

What, then, must be done, for the problem must 
be solved in some way"? 

The writer would suggest that after eliminating 
from the class certain obviously exceptional sub- 
classes, the Commission fix a maximum class rate 
somewhat above the average class rate, to compen- 
sate for reduced rates made to meet the varying 
conditions of " expediency" and "cost to serve." 
From this maximum rate for the class such varia- 
tions must be made, by discounts or wholesale 
prices, as may seem best to fit the existing condi- 
tions; having always in mind that the class as a 
whole must produce the amount of income as- 
signed to it in the class rate calculation. 



22 

WHOLESALE RATES. 

In the former report on Analysis of Rate Calcu- 
lations the writer has taken the position that 
wholesale rates per se, are not justifiable in the 
charges of a public service corporation (see page 
38, Eeport August 25th, 1910), and that differen- 
tiation of rates can only be justified on the "cost to 
serve " or " expediency ' ' principles. This position 
seems theoretically correct. But in devising some 
plan by which the Company may meet the existing 
conditions in the application of these two princi- 
ples to Power and to Business Light, the Commis- 
sion finds itself confronted with the alternative of 
allowing rates or contracts to be made especially 
for certain individual consumers, or of establish- 
ing some scheme for wholesale rates or discounts 
to roughly meet the requirements of the situation. 

It seems unavoidable, then, that here, as at many 
other points in rate making, theory must be sacri- 
ficed somewhat for the sake of practical results, 
for it is an established principle that in public 
service there should be no opportunity for personal 
discrimination, and that rates and schedules should 
be published and should apply to any or all con- 
sumers who comply with the conditions. 

Apparently, about the only possible plan for 
meeting this situation is by some system of whole- 
sale prices, although it is evident that so soon as 
we institute concessions or discounts on account of 
quantity alone we lose sight of actual "cost to 
serve.' ' 

We can, however, obtain some guide to the 
proper application of the Expediency principle by 
inquiring what low prices must be established to 
prevent power and light of large consumers being 
transferred to other sources than the central sta- 
tion to such an extent as to injure the whole body 
of the remaining consumers. 



23 

The question, to a great extent, is to determine 
what are the competing sources of light and power, 
at what quantity of consumption the competition 
begins, what prices must be made to meet this com- 
petition and at what point it is to the best interest 
of the consumers as a whole to allow the business 
to be taken from the central station company. 
Data on these points is now being collected for the 
Commission and will be submitted when required. 

Having fixed these competing points in the 
rates, and having decided upon the quantity of 
consumption at which they become effective, it 
remains to make such compensating allowance in 
establishing the maximum rate as will insure the 
proper income from the whole class. 

The writer is aware that the study of this and 
the former report on rate calculations shows that 
rate making is not an exact science, yet a review 
of the conclusions to be drawn from both reports 
makes it apparent that certain rates may be calcu- 
lated with at least approximate accuracy and 
justice. 

Recapitulating from the former report and add- 
ing conclusions to be drawn from present report, 
we have the following: 

CONCLUSIONS. 

First: Neither the Connected Load nor the 
Maximum Demand of the consumer are rational 
factors to enter into Cost to Serve rate calculations. 

Second: If the Use Theory alone is applied, the 
Investment Charge will distribute itself into a level 
K. W. H. charge, and the only differential element 
will be the application of the Customer Charge. 

Third: There is at present no practical method 
of obtaining data for calculating individual Cost 
to Serve rates according to the Peak Responsibil- 
ity or Cause Theory, and any calculation on this 
theory must be based upon Class Factors. 



24 

Fourth: For the general good of the consumers 
it may be necessary to modify Cost to Serve rates 
on the Expediency principle. 

Fifth: By using the records of feeders on which 
certain classes or portions of classes have been 
segregated, it is possible to obtain satisfactory 
data as to the class peak responsibility for some 
classes. 

Sixth: On account of close similarity in results 
of Cause Theory calculation and Use Theory calcu- 
lation, there is no great difficulty in assigning rates 
taking both theories into account. 

Seventh: Customers' Charge is an exceedingly 
important factor in establishing residence rates, 
and items admitted to the charge need to be closely 
scrutinized. 

Eighth: In Residence Lighting it is possible to 
reach tolerably accurate results under both Cause 
Theory and Use Theory, and these rates are justly 
applicable to the individual. 

Ninth: Corect Power rates can be calculated, 
but will have to be adjusted to meet " Expediency " 
conditions. 

Tenth: In the Business Light class, Cause The- 
ory rates for the variety of services under that 
head cannot be calculated closely with present 
available data, but Use Theory rates must be taken 
as a base to work from, and adjustments made ac- 
cording to judgment and " expediency " conditions. 

Respectfully submitted, 

JAMES E. ALLISON, 

Commissioner and Chief Engineer. 



LIBRARY OF CONGRESS £ 



021 092 278 7 



